A contained experiment in Medicaid finally gets uncovered

Michael Flemons was like a lot of tough bosses. As president of MDF Enterprises, a Dallas company that provided "trauma" therapy to Medicaid patients there and in Houston, Flemons always kept one eye fixed on the company's bottom line and the other open for opportunities that could help him reach new heights.

Flemons was also strict with his employees, never allowing the smallest details to escape him. His favorite management tool was the memo. When Flemons suspected employees of drawing out the noon hour, he sent them a memo regarding the company's 60-minute lunch break. In another memo, he reminded employees to sign out whenever they left the office.

When he caught wind of some unprofessional conduct in April 2000, he penned a memo in which he listed the most frequent types of "counterproductive" behavior in the workplace. The failure to offer proper telephone greetings topped the list.

Mark Graham

Coates says her marriage to "snuggle bunny" started her skid into crime.

"Remember that our clients or costumers [sic] are the primary reason we are in business," Flemons wrote. "Without the clients this is no business."

Flemons's memos are now known as government exhibits 247 through 266. And as a resident of the Dallas County Jail, confined there as a result of crack cocaine addiction, he had lots of time to draft them.

But Flemons's biggest problem was his clients -- or rather the lack thereof at his Trauma Resolution Center, a criminal enterprise Flemons ran with his wife and co-conspirator, Debra Coates.

"To me, what was incredible was they saw no patients. Yet you have to look at what they were billing for," says Shane Read, an assistant U.S. attorney who recently prosecuted the couple. "The amount of Medicaid bills is mind-boggling."

Last month, Read's prosecution of the couple wrapped up a three-year investigation by the Texas Attorney General's Office and the FBI. On May 24, U.S. District Judge Barbara Lynn sentenced Flemons to ten years and three months in prison after a jury convicted him on 13 counts of health care fraud and conspiracy to commit health care fraud. Last summer, Coates pleaded guilty to similar charges and is serving a five-year, eight-month prison term.

Unlike most Medicaid scams, which involve overbilling practices, this bizarre scheme had no patients. More remarkable was Flemons's computer skills, which were so efficient that he and Coates raked in millions without having to show up at the office. That was a good thing for them, because neither one of them could make it into the office: Flemons, 49, was usually in jail, while Coates, a 50-year-old kidney transplant patient, spent most of her days in bed.

If it weren't for taxpayers, Coates wouldn't even be alive. In 1988, Coates, a licensed social worker and Dallas County employee, was diagnosed with renal failure, meaning both her kidneys gave out. She almost died in 1990, when doctors transplanted a kidney from a man killed in a car crash. While she recovered, Coates watched television and discovered that the city's crack cocaine epidemic had exploded into daily incidents of homicide.

There in her county bed, Coates got the idea to start a counseling center where she would help people whose relatives had died in homicides and other traumatic incidents. She launched her Trauma Resolution Center two years later.

As a licensed social worker, Coates was qualified to do business under the federal Medicaid program for the poor. She would provide counseling sessions to Medicaid patients and afterward would bill Medicaid for reimbursement. The process requires the patients' Medicaid numbers to be included with every bill, along with a description of their illness and the services they received.

Initially, Coates says, she really did help people. That changed in 1995 when she married Flemons and asked him to take over the center's operations. At the time, Coates was aware that her new husband, whom she called "snuggle bunny," had a taste for cocaine.

"I didn't know how severe it was. I thought, 'Oh, I'll just send him to rehab, and he'll be just fine,' " Coates says. "That shows how much I knew about drug addiction."

That habit led to multiple trips through the Dallas County courts, where Flemons was given chance after chance in court-ordered rehabilitation programs. While his co-addicts searched for a higher power, Flemons found ways to expand the Trauma Resolution Center.

As the center's new CEO, Flemons determined he could increase the company's earnings by building up the number of "patients" he could bill for. He dispatched a team of recruiters into low-income neighborhoods, offering to help Medicaid participants by paying their rent or utility bills in exchange for their Medicaid numbers.

Back at the office, Flemons installed new software to modernize the center's billing operations. Flemons and Coates then used the numbers the recruiters had rustled up to bill Medicaid. Soon the couple began submitting computerized bills for patients they never saw, including entire families. At one point, they even submitted bills for a three-month-old infant Coates had diagnosed as suffering from "anxiety."

"When it came down to the billing the state would only pay for one-on-one sessions. So I'm saying, 'Well, okay, we'll stretch the imagination a little bit, you know, I'll see the whole family one-on-one. So I billed for the whole family," Coates says. "What can I say?"

The numbers speak for themselves: On December 6, 1997, for example, Coates submitted bills for 696 hours' worth of counseling that day. A week later, she billed for 688 hours in a single day. The week after that, the number topped 850 hours.

Flemons, meanwhile, started a branch in Houston near the Astrodome. The expansion, Coates says, was an idea Flemons got while he was attending a court-ordered rehab program in Houston. "The counselor there was a drug addict and they became friends, so they opened an office there," Coates says.

Business boomed. In 1995, they took in just $9,200 worth of Medicaid payments. By 1999, with the new Houston office open, they had netted more than $970,000 and were well on their way to passing the million-dollar mark when the feds arrived in May 2000. In just over four years, the couple amassed a net of $2.8 million.

As a free man, Flemons would tap the company's bank account for spending money. FBI agents discovered that it wasn't unusual for Flemons to go through $3,000 in a week. That didn't include the six-figure salary he paid himself, even while he was confined. Perhaps he justified the salary by the work he accomplished inside his jail cell, where he monopolized the communal telephone.

Usually, Flemons called the office on Mondays to see how many billable hours the staff had submitted to Medicaid. He'd call back on Wednesdays to ensure that the reimbursements had been automatically deposited. Other days, Flemons would guide his staffers through computer glitches and other routine problems, according to staffer Ginny Thorpe, who later testified against Flemons.

"Michael would walk me through over the phone sometimes," Thorpe testified, adding that the conversations came in spurts. "He would call back because the phone would get disconnected."

During his trial in January, public defender Richard Goldman argued that Flemons couldn't have carried out the scheme because he was in jail. The defense strategy might have worked, if it weren't for the memos.

"They showed he was just up to his ears in it," says Read, the assistant U.S. attorney.

Flemons scolded his employees in one memo for billing errors that caused the company's rejection rate by Medicaid to reach 19 percent. In another memo, he promised his staff that the year 2000 was going to offer "unique opportunities" for the company to "solidify itself in the current ever changing health industry." At the end of the memo, he wrote, "see the vision, catch the fire, walk the victory!"

At his sentencing hearing, Flemons humbly confessed that he "neglected" his responsibilities as a manager.

"In my pursuit of drugs, I guess I left no stones unturned. I've been paying the price for it and rightfully so," Flemons said. "I'd hate to think of the number of people who could have received services but didn't because of this fraud."

Coates, with her health problems, will now spend her time in the Federal Medical Center prison unit in Fort Worth, a fairly easy existence. Her days consist of rising from bed, eating, watching her favorite soap operas, eating and going back to bed."Actually, it isn't too much different from the way I was living on the outside," Coates says, "except I have a lot more company."